Preferential trade agreements* are a prominent feature of today’s trading system. They have become an important trade policy tool for virtually all trading nations. The number of preferential trade agreements and most importantly the world share of preferential trade have been steadily increasing over the last decades.
Rules of origin are important legal instruments for the application of preferential trade agreements. With the proliferation of these agreements, economic operators are faced with a plethora of divergent and often overlapping preferential rules of origin which present challenges both to the business community and the authorities implementing origin legislation.
* The WTO speaks about Regional Trade Agreements(RTAs). This term is misleading since many preferential agreements extend further than the regional level.
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The Multilateral Trading System of the World Trade Organization (WTO)
The WTO system emerged from the Uruguay Round of multilateral trade negotiations and deals with free movement of goods under the General Agreement on Tariff and Trade (GATT 1994). The GATT aims at creating a liberal and open trading system based on four basic rules:
- Protection of domestic production is possible, but only through tariffs;
- Countries are requested to reduce their tariffs in multilateral trade negotiations. Tariffs which are reduced in this way cannot be increased anymore (are bound);
- Tariff reductions negotiated between WTO members have to be granted without discrimination among all other WTO members (most favoured nation clause);
- Imported goods have to be treated on domestic markets like domestically produced goods (national treatment).
The MFN rule prohibits discrimination among goods originating in different countries and the national treatment prohibits discrimination between imported and domestically produced goods. There are however some exceptions to the MFN rule: preferential trade agreements offer market access going beyond the Most-Favoured Nation Treatment (non-discrimination) (or short MFN-treatment) Article I since customs duties are largely dismantled for trade among the free trade partners.
The multilateral trading system of the WTO foresees three distinct possibilities to bypass MFN treatment:
- negotiations of Preferential Trade Agreements with a reciprocal elimination of trade barriers under GATT Article XXIV;
- establishment of preferential trade relations between developing countries or the granting by developed countries of autonomous preferences to developing countries (Generalized System of Preferences (GSP)) under the Enabling Clause1;
- granting of preferential market access through GATT Waivers2 .
1 Decision by signatories to the General Agreement on Tariffs and Trade (GATT “CONTRACTING PARTIES”) in 1979 allowing derogations to the most-favored nation treatment in favor of developing countries called “Differential and more favorable treatment reciprocity and fuller participation of developing countries”.
2 Permissions granted by WTO members which allow WTO members not to comply with normal commitments. Waivers have time limits and extensions have to be justified. They have to be approved by three-quarters of the WTO members.
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The Proliferation of Preferential Trade Agreements
The kaleidoscope of preferential trade agreements with their bewildering range of geographical configurations at regional and extra-regional level containing a “tangle of rules of origin prompted worries about the spaghetti bowl phenomenon” 4 expected from the proliferation of preferential trade agreements.
This highlights the need for the World Customs Organization to support WCO Members and trade interests in improving the administration and management of preferential rules of origin.
Especially, the negotiations of Economic Partnership Agreements (EPAs) with their large provisions of rules of origin raised the awareness of developing countries for the complex problems related to a correct management of rules of origin.
4 expression created by the economist Jagdish Bhagwati from Columbia University to portray the problems afflicting the world trading system by the increasing number of preferential trade relations with its complicated web of hub-and-spoke type of overlapping free trade agreements.
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Source: WTO Discussion Papers No. 12 “The Changing Landscape of Regional Trade Agreements: 2006 Update”
Note that the preferential network in reality is more complex, including many other preferential trade relations often resulting in overlapping preferential trade relations. |
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The World Customs Organization (WCO) was foremost involved in the preparations for the negotiations for the harmonization of Non-Preferential Rules of Origin undertaken by the World Trade Organization (WTO) under the Agreement on Rules of Origin. In contrast to Non-Preferential Rules of Origin where harmonization had been judged as feasible, the WTO members felt that the harmonization of Preferential Rules of Origin seemed not to be realistic, given the powerful political economic forces that generate and determine the preferential origin regimes taking into account the specific factors of the individual trade relations (size of the economies involved, the development of the economy or other characteristics of economic parameters). On the contrary, identical rules as an objective of an international harmonization of preferential rules of origin are not practicable and might have effects on trade flows and investment decisions which could even be harmful for certain economies.
Given the central role of Customs services in the management of Preferential Rules of Origin in most countries, WCO Members agreed to increase the profile of the WCO in the field of Preferential Rules of Origin and a new approach was proposed to support WCO Members and trade interests in improving the understanding and proper application of Preferential Rules of Origin. The WCO Members agreed to increase the role of the Organization in the field of Preferential Rules of Origin and an Action Plan was approved by the Council at its 109th / 110th Sessions in June 2007 containing - amongst other tasks - the establishment of a Comparative Study on Preferential Rules of Origin.
The variety of different trading blocks
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ASEAN |
Association of South East Asian Nations |
CACM |
Central American Common Market |
CARICOM |
Caribbean Community and Common Market |
CEMAC |
Central African Economic & Monetary Union |
CIS & EAEC |
Commonwealth of Independent States & East Asia Economic Caucus |
ECOWAS |
Economic Community of Western African States |
GCC |
Gulf Cooperation Council |
MERCOSUR |
Mercado Commun del Sur |
NAFTA |
North American Free Trade Agreement |
SACU |
South African Customs Union |
EURO-MED |
Pan Euro Mediterranean cumulation system |
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| Major trading blocks (the illustration does not depict all existing preferential trading relations) |
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The significant number of trading blocks and agreements with their variety of differing models of rules of origin provisions creates a complex mosaic of those rules. Europe and the Western Hemisphere being the regions with major preferential trade activities constitute the most comprehensive models of rules of origin:
Europe has the largest number of preferential trade agreements with far-reaching harmonization of origin legislation (EURO-MED Cumulation System). |
The Western Hemisphere with the North American Free Trade Agreement (NAFTA) is one of the most important players in the field of preferential trade. |
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These two origin models encompass virtually all aspects of rules of origin provisions found in origin legislations worldwide and they can be taken as models to exemplify the different origin legislations in a comprehensive manner. The need is felt even more to compare these two origin approaches since the European and the North American origin legislations are enshrined in two completely different legal frameworks.
With the analysis of these two models of origin legislation, it is possible to explain and exemplify all aspects of rules of origin found in various origin legislations worldwide. All existing rules of origin legislations are in fact influenced by one of these two origin models or they are composed of elements taken from both models. Thus, the Secretariat believes that it is not appropriate to include too many different rules of origin models into the study. Accordingly, the Secretariat limited the survey to the origin rules found in the European and the NAFTA origin systems.
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In order to maintain certain flexibility for additional topics and to keep the survey open for origin legislations of other trade arrangements, the Secretariat decided to publish the Study electronically in a modular form which groups the Study into separate modules of different topics and agreements.
A user may consult the Study by choosing either a specific topic or a specific agreement. Specific topics which are normally found in origin models are analyzed in a general way. Thereafter the links connect the user to the same topic found in the European and NAFTA context where specific analysis is given on the basis how the relevant agreement is dealing with the specific topic.
The modular concept of the survey also allows users to consult a specific topic of an agreement and to proceed from there to the part of the generic analysis of that topic. |
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